You may be years away from selling your business, but it’s never too early to understand what the process involves.
If you have ever promised your child a treat in return for good behavior, you know all about negotiating leverage. When selling an attractive business, you also have leverage—but only up to the point where you sign a letter of intent (LOI), which almost always includes a “no shop” clause requiring you to terminate discussions with other potential buyers while your newfound “fiancé” does due diligence.
After you sign the LOI, however, the balance of power in the negotiation swings heavily in favor of the buyer, who can then take their time investigating your company. At the same time, with each passing day, you will likely become more psychologically committed to selling your business. Savvy buyers know this and can drag out diligence for months, coming up with things that justify lowering their offer price or demanding better terms.
With your leverage diminished and other suitors sidelined, you are then left with the unattractive options of either accepting the inferior terms or walking away.
Here are seven things you can do—before you even put your business up for sale, and before signing an LOI—to minimize the chances of your deal dragging on for months and becoming watered down:
1. Make sure your customer contracts have “successor” clauses.
Have customers sign long-term, standardized contracts, including a clause stating that the obligations of the contract survive any change in company ownership.
2. Nurture and prepare a group of 10 to 15 “reference-able” customers.
Acquirers will want to ask your customers why they do business with you and not your competitors. Before you sign the LOI, cultivate a group of customers to act as references.
3. Ensure your management team is all on the same page.
During due diligence, acquirers will want to interview your managers without you in the room. They want to find out if everyone in your company is pulling in the same direction.
4. Consider getting audited financials.
An acquirer will have more confidence in your numbers and will perceive less risk if your books are audited by a recognized accounting firm.
5. Disclose the risks up front.
Every company has some risk factors. Disclose any legal or accounting hiccups before you sign the LOI.
6. Negotiate down the due diligence period.
Most acquirers will ask for a period of 60 or 90 days to complete their due diligence. You may be able to negotiate this down to 45 days—perhaps even 30 with some financial buyers. If nothing else, you'll alert the acquirer to the fact that you're not willing to see the diligence drag out past the agreed-to close date.
7. Make it clear there are others at the table.
Explain that, while you think the acquirer's offer is the strongest and you intend to honor the “no shop” agreement, there are other interested parties at the table.
If you take all seven of these steps, you will protect the value of your business as the balance of power in the negotiations to sell your company swings from you to the buyer.
Let’s say you’re in the market for buying a house and you go to view one that looks appealing in the ad. How does it look on the inside? The outside? What about the location? What is your general impression?
Like your house, your business projects an image to potential buyers. When they come to see your business for the first time, your “curb appeal” can attract a buyer to your business—or cause them to walk away from it.
Do you need to improve your curb appeal? Here's a three-step plan: 1. Fix Your Leaky Faucets
Perhaps, like many other business owners, you started your business from scratch with one or two employees and now you have 20 people working for you. But do you have the appropriate HR infrastructure in place for that size of a company? Perhaps you even take pride in your informal management style, but it can prove to be a liability when it comes time to sell.
Make sure your human resources policies are at least as stringent as those of the company you hope will buy your business. Some basics to have in place:
• A written policy making it clear you forbid any form of harassment or discrimination;
• A written letter of employment for each staff member;
• A written description of your bonus system;
• Written policies for employee expenses, travel and benefits. 2. Assemble Your Binder
When you go to buy a house, it will give you confidence if the owner has the instruction manuals for the appliances, information on where they were purchased, and who to call if one of them breaks down.
Similarly, when a potential buyer looks at your company, he wants to see that you have your business information in order. Documenting your office procedures, core processes, and other intellectual capital can help you attract more bidders and a higher price for your company, while also lowering the chance of the deal falling apart during diligence.
If you want to attract a buyer one day, your business needs a binder with instructions for basic functions, such as:
3. Document Your Intangibles
- Opening up in the morning and closing down at night;
- Forms and step-by-step instructions for routine tasks;
- Templates for key documents;
- Emergency numbers for service providers;
- Billing procedures for customers.
- How your company is positioned in the market and your marketing tools.
Intangibles for house buying might include: Is the house near a good school or daycare? What kind of neighborhood is it? What kind of commute are you looking at to get to work?
Your business also has intangible, often intellectual, assets that a potential buyer needs to be made aware of, such as:
- Proprietary research you’ve conducted;
- A formula for acquiring new customers;
- Criteria you use to evaluate a potential new location;
- Your unique approach to satisfying a customer.
As with selling a house, your company's curb appeal can go a long way toward closing a deal.
To grow a valuable business – one you can sell – you need to set up your company so that it is no longer reliant on you.
This can be easier said than done, especially when, like a PR consultant or plumber, what you are selling is your expertise.
To scale up a knowledge-based business, you first have to figure out how to impart your knowledge to your employees, so that they can deliver the goods. However it can be difficult to condense years of school and on-the-job learning into a few weeks of employee training. The more specialized your knowledge, the harder it is to hand off work to juniors.
The key to scaling up a service business can often be found by offering the service that prevents customers from having to call you in the first place. You have to shift from selling the cure to selling the prevention.
Fixing what is broken is typically a hard task to teach; however, preventing things from breaking in the first place can be easier to train others to do.
For example, it takes years for a dentist to acquire the education and experience to successfully complete a root canal, but it’s relatively easy to train a hygienist to perform a regularly scheduled cleaning.
It’s almost effortless for a real estate manager to hire someone to clean the eaves trough once a month, but repairing the flooded basement caused by the clogged gutters can be quite complex.
For a master car mechanic, overhauling an engine that has seized up takes years of training, but preventing the problem by regularly changing a customer’s oil is something a high school student can be taught to do.
For an IT services company, restoring a customer’s network after a virus has invaded often takes the know-how of the boss, but preventing the virus by installing and monitoring the latest software patches is something a junior can easily be trained to do.
When you’re selling your expertise, it can be tough to hire a team to do the work for you. As ironic as it sounds, sometimes the key to getting out of doing the work is to offer a preventive service, which not only maintains your business income, but also eliminates the need for someone to call you in the first place.
Buying or selling a business and other major business decisions got delayed during the last election. Business experts say business owners are concerned about who will be in office and wonder if the newly elected politician will be friendly to business. Can you guess what will happen during the next election? You guessed it….small business owners will take a ‘wait and see’ attitude to decisions to expand, buy or sell a business. History will repeat itself again!
Unfortunately, as business brokers there is not much we can do to change this thinking, but my advice to those contemplating buying or selling a business is to do it NOW! Here is a summary of the last three years of small business ownership. In 2008 we had the election and had a ‘wait and see’ attitude. The last two years had the economy in reverse so owners did not want to sell or invest in business. This has created pent up supply and demand. THE TIME IS RIGHT NOW TO SELL YOUR BUSINESS OR BUY A BUSINESS! Next year will be too late because the election will make business buyers shift into the ‘wait and see’ mode.
After dedicating so much time, money, blood sweat and tears into building a business, many owners dream of the day when they will be able to sell for top dollar and enjoy a carefree retirement. For many, their companies are their main source of income and the cornerstone of their wealth. So when it comes to selling the enterprise, the stakes are high.
A recent survey of business activity nationwide shows that many sellers are taking advantage of the window of opportunity offered by today's favorable marketplace. In this recent survey, almost one-third of business owners responded that they are considering the sale of their business. The first question one might ask, given the relatively healthy financial climate, is WHY? Selling when times are good? The answer, for many sellers, can be a resounding YES! Here are some of the reasons why, followed by tips for getting the process started.
There are buyers out there The current economic upturn has depended to a great extent on trimming the corporate fat. Executives and middle managers out of work--and determined not to be "downsized" by big business again--are eyeing the advantages of being in business for themselves. Since 1990, the percentage has steadily grown of those corporate executives who leave jobs in order to become independent business owners. It isn't just the money they are dreaming of--it's the desire for more control over their lives.
How to find qualified buyers? The business broker is the professional to whom sellers turn when looking for serious, "qualified" buyers. The business broker not only helps match the right buyer with the right business, but also educates the buyer in the buy-sell process, alleviating concerns and keeping the transaction in steady forward motion. With plenty of buyers to choose from in today's market, it's more important than ever to identify the time-wasters and those who think they want to buy but really aren't ready to take the big step.
Cash-Out is better than burnout Burnout can come with a business that's successful as well as one that's failing to grow. The right time to sell is before the syndrome becomes a threat to the effective management of a business. What are the warning signs of burnout? Owning a business is hard work, but it should also include an element of enjoyment. The owner who drags himself or herself through every day, with a sense of dread--or boredom--should consider moving on to a fresh challenge elsewhere.
Sell in a positive market Other than burnout and its consequences, there are other factors that can lead to the "forced sale" of a business. Compelling personal problems (a divorce or death in the family, poor health), shortage of capital or outright failure of the business, the lack of heirs to take over--these are the traditional examples. Instead of waiting for unfavorable conditions, potential sellers should keep a eye out for that all-important right time for putting their business on the market. When might that time be?
The Small Business Administration (SBA), in researching selling trends, reports that three to five years is a long enough stretch for many of today's business owners. One in every three business owner plans to sell; many of them right from the outset. The business they've bought is not a legacy for their children--it's a shorter-term investment of their time as well as their money. The ability to present a healthy operation, with an owner in the position to hand over the reins to the next owner is a major advantage in the completion of a successful business sale. One of the surest ways to maximize the value of a business is not waiting too long to sell and selling before the next election season.
Written by Jeff Young, Business Intermediary Confidential Business Sale, Inc.
The Internet is credited for opening the floodgates to business opportunities that were never even dreamed of just a few short years ago. A “place” to do business is now irrelevant as long as you can get connected to customers. Many virtual business owners work from the home, but anyplace you can connect to the internet or get a signal on your cell phone can qualify as a virtual office. But what happens when you have a virtual business for sale? Will your virtual business command a premium price because it is a virtual business?
To get a better understanding of a virtual business, here is an example of a virtual business that is for sale in Pittsburgh. The owner lives in Pittsburgh but the buyer can be anywhere because it is a virtual business. Baseball Sports Agency For Sale. The assets in the business are the contracts and established relationships that the owner has developed in the virtual business.
When you sell a business, you transfer the assets, inventory, customers, systems and procedures to the new owner. There may be a building to buy or lease with the business. In a virtual business, there are usually less tangible items being sold and more intangible items like trademarks, websites, customer lists, software and telephone numbers. Yes, these are things that are the heart and soul of a virtual business.
Virtual businesses today are commonplace. Why go to a bookstore when you can purchase books cheaper online. Zappos has made buying shoes online the way to go. Netfix has reinvented the DVD rental business. The industries supporting virtual businesses are doing well. A perfect case in point is eBay. You could almost say eBay is built on serving virtual businesses.
EBay provides a marketplace for 750,000 businesses that sell online, the majority of which are virtual businesses or home-based businesses. Its PayPal unit enables countless businesses to operate virtually by streamlining their accounts payables and receivables, and even their eCommerce functions. For instance, with PayPal you can purchase needed business services and goods electronically, and issue invoices and get paid for them completely electronically. You also can use PayPal as a plug-and-play shopping cart for processing online eCommerce transactions. And Skype, also owned by eBay, allows virtual business team members to communicate easily and for free.
The traditional concept of employment is also changing with the virtual business concept. Independent contractors have replaced the traditional employees in many companies. High unemployment and an army of disgruntled employees allow companies to get work done with contractors and staffing companies. Virtual companies staffed with contract employees may seem like science fiction, but this is all part of the brave new business world of today. A concern is that when you sell a virtual business with contract employee’s, there’s a risk that these employees leave the business and may even become competitors of the new owner.
Virtual businesses often use a shared office facility to have a physical location to meet customers and conduct business. This is a smart new alternative to traditional offices and executive suites that combines the benefits of physical office space with the flexibility of virtual office solutions. The owner of a virtual business can work from home, out on the road, or wherever else their businesses take them while promoting a polished, professional image of themselves and their businesses.
The shared office facility may provide a full spectrum of address and mail services. Office and conference rooms are available for rent by the hour, day, week or a long term lease. The professional telephone answering service provides business men and women with a dedicated phone line with voice mail and a receptionist to answer and screen their calls. Calls can be seamlessly connected to customers putting them "in the office" wherever they are.
The strategic advantage of a virtual business will create demand for this growing business sector. Pricing and business valuation of a virtual business for sale may require business buyers and business sellers to challenge traditional methods and establish a new set of guidelines for virtual businesses. Business buyers will adapt to the notion that many businesses for sale have a virtual business address.
Written by: Jeff Young, Business Intermediary, Confidential Business Sale, Inc.
There's a great captive insurance agency for sale in Cleveland, OH. Here are six reasons why this business is a great opportunity:
- 100% Bank Financing! If you have a 700+ credit score, prior insurance experience, and no personal debt issues you may qualify for 100% bank financing for this purchase.
- Reduced Downside Risk! The parent company of this captive agency has a buy-back program for their agents that limits your risk.
- Growing Market! This agency resides in a growing Cleveland-area community. The real estate is available, but is not required to be purchased. You can move this business the day you buy it.
- Growth Opportunities! Beyond home and auto insurance there are dozens of financial products that this agency can sell including investments and life insurance. This book of business has not been heavily prospected for additional product sales.
- Strong Track Record! This agency has been open for more than a decade and the customer retention numbers are excellent.
- Transition Help! The current owner is willing to stay on and help train the new owner and the existing staff is both skilled and experienced making this a very easy transition.
If you want more information on this captive insurance agency for sale, please contact us. This insurance agency has provided a very nice living for the current owner for a number of years.
The first time is the most challenging, whether you are buying a car, home or ready to buy a business. A business for sale listing may catch your eye, but what do you do first? Pick up the phone and start asking the Business Broker questions about the business for sale. A professional Business Broker has the answers, even if you don’t have all the questions about the business for sale.
Questions for first time future business owners
Tell me about the business for sale.
How did you get started?
What services does your business provide?
Why are you selling your business?
What are the last three year's sales and earnings?
Who are your biggest competitors?
What are your industry trends?
What do you think are some things I can do to increase sales and profits?
How many employees do you have and are there any employees that are critical to the business?
How long will it take me to really learn this business?
The Process of Buying a Business
Confidential Business Listing/Initial Contact—The listing of the business for sale and your initial call to the Business Broker will provide general information. Consider this like reading the preface of a book. Does the information create an interest to continue? A business listing will typically provide enough information to generate interest while maintaining the confidentiality of the business and owner.
Non-Disclosure and Confidentiality Agreement—A prospective business buyer will sign a non-disclosure and confidentiality agreement before receiving additional financial information. In most cases, it is important that the sale of the business remains confidential during the sales process.
Financial Information Review—Business sellers can provide prospective buyers with a number of different items including the financial statements of the business for sale, tax returns, a list of assets of the business, business valuation reports and cash flow statements. How much and what type of information that is provided is dependent on the type of business and how sophisticated the business is. It is now time to review the information you’ve received in greater detail. You may want to do your own projections of earnings for the next three years based on the history of the company and your anticipated improvements. You may choose to do some research into the general industry if you are unfamiliar with it.
Meeting with Owner/Visit the Business-- If there is genuine interest in the business for sale, the Business Broker will arrange a meeting with the seller. This is typically held at the broker’s office, at a coffee shop or after-hours at the seller’s place of business. This is the time to ask general questions on anything and everything but not the time to begin negotiations on price and terms for the sale of the business.
The Offer-- Your offer to buy the business will typically be a conditional offer or in the form of a Letter of Intent (“LOI”). It will also contain specific requirements for the Seller as far as training and transition and non-competition clauses. With the offer, you will provide a reasonable deposit based on the purchase price. The purchase offer typically contains other provisions such as a stated due diligence period, deadlines for obtaining financing, and a specified closing date to buy the business.
Due Diligence Period—A reasonable amount of time is needed when buying a business to conduct due diligence. You and your advisors need to verify and review the information given to you including any information that may have been withheld prior to your offer.
Agree on Price and Terms--The details of your accepted offer of the business for sale or letter of intent will be forwarded to the lawyers for both parties for drafting and review of Definitive Purchase Agreement. The Definitive Purchase Agreement is the actual agreement of purchase and sale. It typically includes all of the conditions and clauses in the original offer or LOI plus any additional clauses and conditions you and the seller agree upon. This agreement is typically drafted by the buyer's lawyer.
Closing-- Close the purchase and begin your first day as the owner of your very own business. The seller will be available to assist in the transition of the business. Now you and your family are part of the American dream of owning your own business!
Here is one final piece of advice on buying a business. Be patient and persistent. The road from initial inquiry to closing the transaction is usually long taking weeks even months to complete. There may be several twists and turns in the road to buy a business but remain flexible, be thorough and determined to stake your claim in business ownership!
Written by: Jeff Young, Business Intermediary, Confidential Business Sale, Inc.
Just like the A-Team could solve the world’s problems in a moment’s notice business owners need their own “A-Team” when it comes to business sales and transition planning. Let’s take a look at the critical team members:
- Business Intermediary – Business intermediaries, or business brokers, are the deal makers that bring together third party buyers and sellers. While not every business transition will be or needs to be a third party sale the advice of a business intermediary can be invaluable. Business Intermediaries can provide information on current deal flow, pricing, and the business sale environment in general.
- Attorney – No matter what one’s business transition might look like an attorney will play a critical role on the advisory team. Attorneys will draft the necessary purchase documents, non-compete agreements, consulting contracts, and other legal documents.
- Accountant – Every financial transaction has tax implications. The sale of one’s business is perhaps the largest financial transaction one can undertake. Deal structure and deal taxation can greatly impact a seller’s net cash from the sale and an accountant should be consulted early and often during the transition process.
- Financial Advisor – What financial resources will you need post-transition to maintain your lifestyle and living expenses? A financial advisor can help you draft a succinct plan regarding your financial needs after the transition.
- Coach – In addition to the other A-Team members listed above a coach can be valuable asset during transition planning. Coaches can provide objective advice and act as a negotiator and intermediary amongst decision makers. More importantly, coaches can help owners dive into their true goals, motivations, and desires. Knowing the ultimate goal is key during the transition process; one should always begin every project with the end in mind.
Do you have your A-Team assembled? If not contact us today to begin your transition planning and we’ll make sure you get the best team of advisors possible around you.
Written by: Kelcey Lehrich, Business Intermediary, Confidential Business Sale, Inc.
Many times with business buyers come into our office they tell us that they are considering either buying a business or buying a franchise. More often than not, one choice is clearly a better idea than the other for a given buyer as there are some significant differences between buying an existing, revenue generating business, and starting up a franchise opportunity.
It is often said in business broker and franchise consultant circles that when you buy a business you buy “history” and when you buy a franchise you buy “mystery”. Existing business purchases are based on prior year’s earnings history and the actual economic results of that business. Franchise startups are based upon projections about what the franchise could or should produce. When purchasing an existing business you may be able to write yourself a pay check right out of the gate. When starting up a new franchise you may not even have any revenue in the first few weeks.
Franchise marketing materials often use the phrase “in business for yourself, not by yourself” and the phrase is quite accurate. Business buyers who purchase an independent business are by themselves, they have no built-in support system. Franchise buyers get support and training from the franchisor. More often than not, good franchise owners don’t make good independent business owners, and vice versa.
Do you need to write yourself a paycheck as soon as you’re working in the business? If so, opt for purchasing an existing business. If you’re looking for total freedom and control in your business then head down the business purchase path. If you’re looking for support and training, then head down the franchise purchase path.
Written by: Kelcey Lehrich, Business Intermediary, Confidential Business Sale, Inc.
Are you considering selling your business? I don’t mean selling your business today, next week, or even next year, I mean are you considering EVER selling your business? If so, the check list below will be quite helpful.
As business brokers we see lots of deals come to a screeching halt because the buying party finds out something about the selling party that is “less than appealing”. These issues usually come up in the finer details of the deal or in the nitty-gritty of due diligence. If you want to make your company more attractive to any potential buyer, ever, then examine the list below and make sure you’ve got all of your bases covered.
- Corporate Records – Every business needs clean corporate records, and I’m not referring to accounting, that is another matter all together. Corporate records are the board of directors meeting minutes, shareholder agreements, buy-sell agreements, and other pertinent documents that every corporation needs to have on file and current. Each form of legal entity (partnership, corporation, LLC) has their own set of specific records and agreements that should be maintained depending on the specifics of the situation. If you’re not 100% positive that your corporate records are in tip-top shape then contact a local business attorney for a corporate records audit.
- Employee Matters – Employees are one of the most valuable assets any business has – they perform the work of the business! Employees can also be one of the largest liabilities for a business when claims of harassment or injury are brought forward. Do you have an employee handbook? Do you have written employment agreements with every employee? Do your key employees have non-compete agreements or golden handcuffs to keep them from leaving? What is your history with the bureau of workers compensation? Business buyers want to acquire businesses with clean employment records. Consult with an HR or staffing consultant to ensure that you are doing everything you can to reduce your employee risk.
- Intellectual Property – Does your company have a valuable name brand? Did you invent a widget that changed your industry forever? Do you have a trademark on that name brand and a patent on your widget? Without good intellectual property protection your business is worth significantly less to a potential buyer. Work with your Intellectual Property attorney to ensure that every valuable non-tangible asset your company has is legally protected. You will sleep better with these protections in place and your offer letters at the time of sale will be much higher to boot!
Written by: Kelcey Lehrich, Business Intermediary, Confidential Business Sale, Inc.